The Role of FIDIC contracts in the construction industry

Kaj Mller (M. Sc. C. E., Exec. MBA)

FIDIC Executive Committee member since 2011
Liaison with FIDIC Contracts Committee
Head of Export @ Sweco Group
Scandinavian originated Engineering Consultant group with app 9 500 employees and with
home-market business in 12 European countries and export business in 60 80 countries.
Providing services in architecture, engineering and environment management as Advisors,
Engineers, Designers, Works Supervisors, Panellists, Inspectors to all parties along the
project time-line, from early political decisions to final decommissioning.

The Role of FIDIC contracts in the construction industry

The next 20 minutes:
- The characteristics of the engineering /
construction market and the industry, from a
contracts perspective;
- FIDIC contracts in its context, pre-contract
efforts recommended by FIDIC
- FIDIC Contracts and Agreements
- A few cases from reality

Engineering / Construction market and industry

Projects macro-characteristics:
- Lots of $ at stake;
- Publically exposed and (sometimes) politically
questioned;
- Dependant on the unpredictable motherearth;
- Works (too) often procured on a lowest-price
bases;
- Minimal time-line between financial close and
commissioning & hand-over.

Panama Canal 2014 Expansion. Illustration by world property journal. Estimated CtC 7 billion USD.

Engineering / Construction market and industry

Projects micro-characteristics:
- Multi-disciplinary, technically complex projects;
- Each project is a temporary enterprise;
- Parties has most likely never worked together
before;
- Globalisation generates project teams with
multiple nationalities and thus different ways
of operating, business culture and social,
environmental and ethical compasses;

Copenhagen ring metro Project.

Programming of the project set your aim

The nature of every-day business for
the industry:
- Unknown counterparts;
- Unpredictable project horizon;
- Innovative solutions;
- Fast progress;
- Attractive price tag; and

- Accurate end-result.

Programming of the project set your aim

However, these days, three external
drivers which makes this work less
troublesome

- Interest rates
- IS/IT (engineering, design, planning,
communication, coordination.)
- Recognised conditions for cooperation

Open BIM by Scia

Programming of the project set your aim

Conditions for cooperation for FIDIC,
it starts way earlier by accurate
Programming
Given all macro and micro characteristics of
the project, what are the answers to all the
Basic Project Considerations such as:
o
o
o
o
o
o
o
o
o

Location, physical constraints;

Legal constraints;
Financial constraints;
Time constraints;
Design and construction constraints;
Operational constraints;
Employers abilities;
Environmental constraints; and
Social constraints.

And thus, what Project Strategy does this

generate?

FIDIC Procurement Procedures Guide. 2011

Programming of the project set your aim

Project Strategy
- How to finance? (Public, Private, PPP,)
- How to structure your Works / Services
packages?
- Fast track or normal speed?
- Employers role and influence?
- How to allocate risk?
- What payment methods?
- How to procure?
- How to implement?

The answers to this should form a solid

base for which delivery methods and
contract forms to use.

Choice of delivery methods type of contract

Use the appropriate Delivery Methods:

Model agreements for

professional services:

Client/Consultant
Joint Venture
Sub-Consultant
Representative

Form of contract for works:

Construction and SubContractor
Construction (MDB)
Plant, Design & Build
Turn Key (EPC)
Dredging
*Underground works

Form of contract for works

and operations:

Design, Build & Operate

(DBO)
*Operate, Design and Build
(ODB)

Advantages with FIDIC contract & agreement forms

CLEAR, COHERENT
Essential clauses.

Detailed definitions.
FAIR, EQUITABLE

Consistent structure.
Risk allocated to party best placed to
control it, bear it, and deal with it.

THIRD PARTY
Drafted by consulting engineers who
design and manage projects.
COMPLETE, FLEXIBLE
Range covers most needs.
RECOGNISED

Readily adaptable to fit requirements.

Positive FIDIC image.

World-wide acceptance

Advantages with FIDIC contract & agreement forms

In addition, you get
- 50 year track record by development
funded projects bi- and multi-lateral,
amongst others;
- Reduced risk for corruption
balanced, well understood and
recognised;
- International standard, efficient
implementation, less risk for disputes;
- Private & public sector support;
- Extensive training options;

- Backed up by FIDIC best business

practices such as Risk, Integrity,
Sustainability, Capacity Building

Choice of Contract is crucial for project success

A sample-recommendation
An Turn Key (EPC) delivery method is not
suitable for use if:
- There is insufficient time or information for
tenderers to scrutinise and check the
Employer's Requirements or for them to
carry out their designs, risk assessment
studies and estimating;
- Construction will involve substantial work
underground or work in other areas which
tenderers cannot inspect;
- The Employer intends to supervise closely or
control the Contractor's work, or to review
most of the construction drawings; or
- The amount of each interim payments is to
be determined by an official or other
intermediary.

Choice of Contract is crucial for project success

A few discouraging examples
The main characteristics of this case-project were:
- Design and Construction of a mega-sized green
field project over 4 years;
- First ever commercial application of the core
process technology;
- Significant and crucial public permits needed,
adaption to national regulation crucial;
- The project represents a crucial, hazardous risk
to society if implemented incorrectly;
Yet, the project was procured an EPC delivery
method with Lump Sum payment method.
Claims and counter claims at app 100 % of contract
price. Arbitration since 2008. Current completion
forecast 7 years late and 300 % over budget.

Choice of Contract is crucial for project success

A few discouraging examples
The main characteristics of this case-project were:
- An 8.7 km long tunnel in unknown, but very challenging,
geological conditions. Planned time for completion, 5.5 years;
- Procured on an EPC Lump sum contract bases with very poor
tests and studies of ground conditions;
- 1st EPC contractor bankrupt after 4 years due to sever progress
problems and engineering difficulties. Released from the
contract against an LD penalty of 60 % of the initial contract
value;
- 2nd EPC contractor suspended year 6 by environmental
authorities due to work-methods in breach against national
env. legislations. Eventually terminated;

- 3rd contractor procured on a quantity based compensation

model with new tunnel drive method.
Project completion planned for 23 years after commencement at
a final cost at 1 100 % over budget.

FIDIC Contracts and Agreements for successful projects

A final (personal) recommendation

The choice of delivery method and
payment method should not only be
based on market (demand/supply)
conditions, but more importantly based
on the characteristics of your project.
Your tools for success are available at
www.fidic.org